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What Medicare Surplus?

Volume VII, Number 2 March 22, 2001

The White House decision to jettison trust-fund accounting in its
budgetary treatment of Medicare is understandably causing controversy. Within the
trust-fund framework, Medicare is running a large surplus.
Within the cash accounting framework adopted in the White House budget, Medicare is
deep in deficit.

The Concord Coalition supports this change because it has always believed
that cash accounting provides a more honest measure of Medicare's fiscal burden.* In recent years, the improvement in Medicare's
trust-fund balance has persuaded many that the program will be self-financing for decades
to come. The White House correctly shows that
Medicare will require a massive general revenue subsidy this year and every year.

However, Concord strongly disagrees with the inference the White House
draws--that if Medicare isn't running a surplus there is more room for tax cuts. If anything, just the opposite is true: The bigger
Medicare's fiscal burden, the more compelling the case is for saving projected budget
surpluses and the less room there is for either tax cuts or spending hikes.

An Accounting Fiction

Trust-fund
accounting obscures the fiscal bottom line by counting prior-year surpluses, together with
the interest-earned thereon, as genuine savings. In reality, these assets are
simply claims on future taxpayers. According
to the White House, Medicare will run a trust-fund surplus of $526 billion over the next
ten years. Excluding interest, its cash surplus of earmarked tax revenue over outlays will
be just $277 billion.

These figures,
moreover, only refer to Hospital Insurance (HI) or Medicare Part A, which brings us to a
second problem. Trust-fund accounting lets leaders ignore Supplementary Medical Insurance
(SMI), Medicare's other half. The SMI or Part B trust fund is always
solvent since general revenues plug any gap between beneficiary premiums and
outlays. Solvency, however, is not the same as sustainability. The White House projects
that SMI's general revenue subsidy will total $1,171 billion over the next ten years.
Subtracting this from HI's cash surplus yields a combined deficit of $894 billion.

Critics object to
combining HI and SMI. But why, when they pay
benefits to the same people for the same general purpose?
Old-Age and Survivors Insurance and Disability Insurance, which have much less in
common, are routinely totaled up and called Social Security. The critics are right that SMI was never designed
to be self-financing. But that is precisely
the point. Its general revenue subsidy gives
Medicare a large, growing, and permanent claim on the rest of the budget.

Some
defenders of trust-fund accounting acknowledge that Medicare's surpluses may be a
fiction, but argue that they provide a useful justification for saving budget surpluses. Let's be clear: The Concord Coalition favors
saving a share of budget surpluses at least equal to Social Security's and
Medicare's trust-fund surpluses. However,
the economic case for doing so--boosting national savings in advance of the age
wave--has nothing to do with trust-fund accounting.
In fact, putting too much emphasis on positive trust-fund balances, by making the
programs seem more affordable, may actually undercut the case for savings.

An Anachronistic Distinction

Trust-fund
accounting is a major obstacle to Medicare reform.
It papers over the program's cash deficits. And it perpetuates an
anachronistic distinction between hospital care and physician care. Most health policy experts, liberal and
conservative, agree that Medicare
needs to be modernized by turning it into a single comprehensive and flexible insurance
package. This means erasing the old distinction between HI and SMI.

The
White House accounting change is a first step in this direction. Unfortunately, both sides
have confused the issue by mixing it up with the entirely separate question of whether to
save or spend budget surpluses.